European Central Bank chief Christine Lagarde sets sober tone on Middle East war energy and petrol price shock

The risks from the Iran war, says Christine Lagarde, are being underestimated. Amid what the International Energy Agency calls the biggest energy shock ever, the president of the European Central Bank says expectations of a swift return to normal may be “overly optimistic”.

“We are facing a real shock…probably beyond what we can imagine at the moment.”

Speaking to The Economist at the ECB’s headquarters for “The Insider”, our video show, on March 25, Ms Lagarde gave a sober view of the risks to the world economy.

The bank’s technical experts believe “too much has already been damaged”, she said, and that there is “no way” the Gulf’s lost energy supply can be restored within months.

The disruption may last “years”.

The danger, she argued, is that the consequences will emerge only gradually, leading to a “delayed assessment” of how serious the crisis is.

That struck a more pessimistic tone than a speech Ms Lagarde gave earlier the same day, when she said it was “too early to say” which scenario for the energy shock would unfold.

Still, on monetary policy, she said the ECB was “well positioned to respond”.

She is more concerned about government budgets.

“There is not as much fiscal space” as in 2022-23, when countries spent 2.5 per cent of GDP or more to cushion energy costs after Russia’s invasion of Ukraine.

Any support this time should be “tailored, targeted and temporary”.

Policymakers should be mindful of how “broad a blanket” they deploy, and focus on low-income households.

On America’s role in the global system, Ms Lagarde was notably more critical.

Asked whether countries could come together in a global crisis, she quipped: “I can assure you that the central-bank community will get together,” pointedly omitting finance ministers.

She noted that during the financial crisis of 2007-09 the G20 co-ordinated a global response.

“Can you imagine that happening now? The G20 is under US leadership. I’ll say no more.”

She detects echoes of the 1920s, when America turned inward.

Yet she is only partially a “Carneyist” — agreeing with Mark Carney, Canada’s prime minister, that the old order is breaking down, but resisting the idea that it must be rebuilt from scratch.

Multilateral institutions such as the IMF, World Bank and World Trade Organisation, she said, can still be repaired — even if America’s “dominance” within them must diminish.

As with a snake shedding its skin, it is possible to “extract from the old skin a new animal”.

In that world, Ms Lagarde argued, Europe still has a central role to play.

“Europe-bashing is vastly excessive,” she said, suggesting that disappointment reflects high expectations.

The continent, once a “dream” and a “promise”, has been a “brutal success” in securing peace.

Yet some of the successes she cited, such as the Erasmus student-exchange programme, seem underwhelming.

She acknowledges that Europe must do more.

Her priorities, she insists, are clear: a true single market; deeper, more efficient capital markets — “you need the money” — to lift weak productivity and innovation; a digital euro to support integration.

However, the recently proposed “28th regime”, a unified rule book, “lacks ambition”.

But achieving any of this will require political cohesion, which is complicated by the rise of populist nationalism.

Ms Lagarde brushed aside suggestions from figures such as Jordan Bardella, of France’s National Rally, that the ECB could tailor policy to individual countries.

There is “no chance in the world” of that.

The deeper risk, she suggested, is political. Europeans “will have to decide again whether they’re together or not”.

Europe’s shared commitments to the rule of law, democracy and common values are under strain. “Where we massively failed,” she said, is in neglecting distribution, leaving large parts of society feeling left behind.

If that is not fixed, Europe’s economic agenda may matter less than its political survival.